Cross-border swaps cohesion speeds up with trade talks

Greater coordination between Europe and the US on key OTC
derivatives reforms may occur faster if included in trade talks, as platform operators and sell-side firms seek new ways to serve clients in different jurisdictions under
current rules.

Last week the European Commission published a framework for
regulatory cooperation in financial services for on-going Transatlantic Trade
and Investment Partnership (TIPP) talks that began last year. The document does
not highlight specific rule proposals but called upon Europe and the US to reflect
the agreement secured by G-20 nations for swaps reforms in respective final
rules.

PJ Di Giammarino, CEO of regulatory think tank JWG, said the
TIPP discussions may become the forum where cross-border OTC derivatives rules
are determined between the US and Europe.

“The
message we're hearing now is that some of the key extraterritorial issues
between US and European swaps rules will fall within the scope of the TIPP
discussions,” he told theTRADEnews.com.

Di
Giammarino said the shift from concentrating discussions between regulators to
policymakers may not slow the process down as TIPP negotiators had proven they
were well organised and well resourced.

“By
elevating these discussions to the political, rather than regulatory, level, it
may speed up the process towards forming more harmonised rules if the process
works,” he said.

“Until
there is greater cohesion between these rules, all market infrastructure providers will
likely continue to seek authorisation across as many jurisdictions as possible
in order to continue to serve clients globally.”

A
July agreement between the European Commission and US derivatives regulator the
Commodity Futures Trading Commission (CFTC) to work closer in developing
cohesive rules has not yet resulted in concrete rule changes. The ‘Path
Forward’ agreement extended an exemption to European participants of CFTC
rules.

The
onset of mandatory trading on new swap execution facilities (SEFs) for certain
OTC derivatives under CFTC rules has again raised the issue of cross-border
swaps rules as Europe-based dealers will be forced to execute on SEFs for
clients active with ‘US persons’.

Quick movers

Earlier
this month, London-based inter-dealer broker (IDB) ICAP applied to US and UK
regulators seeking to launch a new platform based in London that would meet
rules of both jurisdictions.

ICAP
Global Derivatives will operate as both a SEF under CFTC rules and as a
multilateral trading facility, overseen by UK regulator the Financial
Conduct Authority.

The
platform will use the technology, trading protocols and rulebook developed for
ICAP’s existing US-based SEF. It will trade US dollar, euro and sterling
interest rate products mandated for trading under the CFTC’s ‘made available to
trade’ rule.

Commenting
on the development, a spokesperson for ICAP said the company sought to meet the
needs of its global client base.

“The
purpose of this application is to ensure that in the event of market demand to
facilitate SEF liquidity across Europe and the European markets, ICAP can
leverage its London located capabilities, at the same time as enabling the SEF
and its execution specialists to be accessed directly by US, UK and European
customers,” the spokesperson told theTRADEnews.com.

A
rival SEF operator, TeraExchange, last month signed an agreement with a number
of Europe-based IDBs to execute swaps trades on its platform to meet CFTC rules
so they can continue serving customers that fall under the ‘US persons’ definition.